Effect of inventory errors on financial statements
The following income statement was prepared for Bell Company for the year 2012:
BELL COMPANY | |
Income Statement | |
For the Year Ended December 31, 2012 | |
Sales | $69,000 |
Cost of goods sold | (38,640) |
Gross margin | 30,360 |
Operating expenses | (9,100) |
Net income | $21,260 |
During the year-end audit, the following errors were discovered.
1. A $1,400 payment for repairs was erroneously charged to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used.)
2. Sales to customers for $2,400 at December 31, 2012, were not recorded in the books for 2012. Also, the $1,344 cost of goods sold was not recorded. The error was not discovered in the physical count because the goods had not been delivered to the customer.
3. A mathematical error was made in determining ending inventory. Ending inventory was understated by $1,200. (The Inventory account was written down in error to the Cost of Goods Sold account.)
Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether it would overstate (O), understate (U), or not affect (NA) the account. The effect on sales is recorded as an example.
Error No. 1 | Amount of Error | Effect |
Sales, 2012 Ending inventory, December 31,2012 Gross margin, 2012 Beginning inventory, January 1,2013 Cost of goods sold, 2012 Net income, 2012 Retained earnings, December 31,2012 Total assets, December 31,2012 | NA | NA |
Error No. 2 | Amount of Error | Effect |
Sales, 2012 Ending inventory, December 31, 2012 Gross margin, 2012 Beginning inventory, January 1,2013 Cost of goods sold, 2012 Net income, 2012 Retained earnings, December 31,2012 Total assets, December 31,2012 | $2,400 | U |
Error No. 3 | Amount of Error | Effect |
Sales, 2012 Ending inventory, December 31, 2012 Gross margin, 2012 Beginning inventory, January 1, 2013 Cost of goods sold, 2012 Net income, 2012 Retained earnings, December 31, 2012 Total assets, December 31, 2012 | NA | NA |
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